How strong charitable foundations can plan for the future

How are charitable foundations planning for the long term during short-term uncertainty? Charity Finance convened a panel of experts and Ian Allsop noted their opinions.

The UK has a strong and vibrant foundation sector, the members of which have to strike a balance between present and future beneficiaries. Their independence and longevity of funding gives them an ability to influence and shape policy in both the short and long term. But how do they plan for tomorrow without becoming distracted by what is happening today? And are current models of governance able to maximise the effectiveness that foundations have?

Maintaining spending

Karl Wilding, director of public policy and volunteering at NCVO, cites evidence of how foundations behaved following the disruption of the financial crisis. Referring to the NCVO UK Civil Society Almanac, he says: “From 2008/09, foundations carried on making grants because they were needed more than ever. There was a clear message that beneficiaries wouldn’t be abandoned.”

Returning to the present, Matthew Cox, investment director at the Esmée Fairbairn Foundation, says his organisation is carrying on as usual. “Our biggest risk is not hitting our long-term return target, which is inflation plus four per cent, and our job in the short term is to not get distracted from that.

“There are secondary risks of market uncertainty and volatility, but while we would be concerned that they would hit our cash flow, we would hope that the portfolio has been set up to deal with that. We lock up money for the long term but have a liquidity reserve to free up cash in the short term.”

Cat Fraser, principal – investments at Wellcome Trust, echoes this. “Our focus is on cash flow now more than ever. We have committed to spending £5bn in the next five years.”

For David Renton, director of finance and investment at Guy’s and St Thomas’ Charity, foundations must hold their nerve. “If we get too worried in the short term, it affects our long-term thinking. We need to have the confidence to stick to our risk levels. It can be difficult to predict the markets. They are currently riding high despite political uncertainty – we shouldn’t fixate on value today or else we won’t stay in shape for the long term.”

The Marr-Munning Trust is a considerably smaller foundation than the others represented in the discussion, and while income from its property-heavy portfolio is fairly assured, it still has to take a long-term view in relation to maintenance and retaining value. For director James Fitzpatrick, the big challenge is about balancing the need to conserve capital, generate income and spend money. He asks: “There is always uncertainty, but how should foundations best manage the balance between money in – the finance side – and money out – the grantmaking?”

Renton mentions the introduction of a spending rule at Guy’s that is aimed at dealing with this. “We’d had a committee looking at investments, and it was quite divorced from the team doing grants. The advent of the spending rule was to try to bring those together: so how much investment risk we need to take in order to generate what we're spending.

“There is an element of smoothing included, so if markets change, the spending doesn’t change so dramatically. Smoothing allows a longer-term horizon for spending decisions – even if we model a 20 per cent fall in markets and them staying down for five years, actually we still have a 90 per cent degree of confidence in what we will have to spend. And that’s enormously powerful because then we can start funding longer-term programmes.”

Giles Neville, head of charities at Cazenove Capital, observes that in the short term, investment is about responding to opportunity. “Are you picking up long-term trends? Are your targets realistic? Investors should look at demographics, and issues such as global inclusivity versus isolationism. It is about using the here and now to assess an impact on returns in the long term. It can be difficult, but it is important.”

Perfect timing

All of which illustrates the importance of timing when making investment decisions. Neville reflects on the specific conflict that exists between the short and long term in terms of trustee decision-making, especially in times of nervousness. “Do they have enough of a sense of security to ensure they are less likely to sell at the wrong time?”

Fraser recalls that when she joined Wellcome at the end of 2008, there were plenty of concerns about the wisdom of buying global equities after the collapse of Lehman Bros. However, after a healthy debate, her investment committee was supportive of the actions the investment team was taking. "Having an empowered investment team is really helpful in making difficult decisions like this in a timely fashion," she says.

Renton says there is a risk of selling stocks at the wrong moment. “You don’t want to rush for the exit at the wrong time. Policies that smooth are helpful as they provide the framework to have a discussion and offer greater investment freedom.

“It is also about monitoring and providing information,” he continues. “If you can look back and see patterns from history, it can provide reassurance in difficult times.”

Cox agrees that as long-term investors, this can help overcome nervous or over-cautious trustee reactions. “You need to spend time on communicating the investment process when times are good so that everyone is aligned when the more challenging market conditions arrive, as they inevitably do.”

Governance structures

Fitzpatrick raises the issue of governance when managing for the long term. “In my experience, the default position of boards is to conserve. When developing investment strategy, boards should seek external expertise if they don’t have the expertise themselves. But there is a risk that they end up with a product that they don't have the skills to implement effectively.”

He says the problem is not recruiting trustees per se, but recruiting trustees with the right skills. “Foundations are charities with capital. Therefore we probably find it easier than other charities to recruit trustees. ‘Come and help us spend money’ is an attractive proposition.

“But do all foundations use skills audits to identify the range of specific skills required? It may be possible to find trustees with financial expertise, but not specifically investment-related.”

Renton argues that the governance challenge for the foundation sector is that organisations are effectively running two businesses. “We are managing money and spending for impact. Does our governance always reflect that? It is important to have both angles represented on boards.”

Cox thinks that the lines between spending and managing the investment portfolio have become increasingly blurred. “There is much more direct engagement from the board now; trustees are more clued-up.”

The panellists then consider the pros and cons of trustee terms being time limited. Are limits appropriate? Or do you lose valuable accumulated wisdom and knowledge if there is too much churn?

Neville points out that by having procedures and policies written down, thinking can be passed on when trustees change, while Cox concludes that a ten-year term limit seems a sensible compromise.

Wilding references Malcolm Gladwell’s maxim that it can take 10,000 hours of practice to master a field. “I can see the attraction of time limits but it doesn’t work, especially if you need to take a truly long-term view.”

Diversity of thinking

Fitzpatrick touches on the problem of a lack of diversity on trustee boards, using a phrase which originated from the NHS, where diversity fails to reach the highest levels of hierarchy. “How do we know we are sensitive to the needs we are trying to meet if we’re essentially snowy white peaks?”

Wilding agrees that diversity is a huge problem, and not just because of equality. “Charities need professional strategic people and those with experience at sharp end of life. The stereotype of ‘pale, male, stale’ is borne out. As an example, I have yet to see many foundations which are looking ahead to the digital challenge and investing in it, because a lot of their trustees are not of the age that has grown up with it. There is a culture of risk avoidance rather than management.”

Wilding is not convinced that paid trustees would aid diversity. “You run the risk of getting ‘professional trustees’. But we have got to double down on diversity. Change recruitment processes. There are plenty of good resources on best practice in governance but they are not breaking through.”

He does, however, point out that diversity is one of pillars of the proposed new Charity Governance Code, so is hopeful that this will give boards an added push.

Fitzpatrick is also not a fan of paid trustees, as he thinks going against the voluntary principle could further erode public trust. However, Renton wonders whether boards meet often enough compared to the corporate world. “It is a big ask to move to monthly meetings so perhaps pay is the answer.”

Neville thinks the other key issue is making trusteeship become more valued by employers. “How do you facilitate younger tech savvy people to contribute when they work full time and have young children? Trusteeship needs to be valued by the corporate world.”

Wilding suggests what these challenges means for strategy. “Long-term trends include an ageing population. We all know it’s coming but we are still not ready. So it is about more than knowing. How do you move from knowledge of long-term trends to dealing with it strategically in the short term?”

Renton agrees that foundations haven’t always been being bold enough at spending on strategic issues. “We have a special privilege in being able to have long-term goals. But while we want to be long term, things change within organisations, for example staff turnover, so it isn’t always easy to behave in that way.”

Neville observes that some foundations have taken the decision to spend out, which is a tough one. “How long term a foundation is can be quite individual to mission, cause, circumstance and governance. Are some arguably too long term?”

The challenge challenge

Renton argues that in terms of effective decision-making, foundations need greater external challenge as “we’re too defensive”. Fraser agrees and points out that at Wellcome, the investment committee contains “high profile figures in the financial industry who constantly ask questions, while our investment team meet once a week to challenge each other.” But, she adds, “diversity is a big issue, both of thought and background. I want to know what I haven’t thought about.”

Renton identifies the problem of confirmation bias in decisionmaking. “You have got to say what you really think and not just agree with the majority. You need an explicitly-stated culture of allowing people to speak out and striking a balance between a variety of views.”

Fraser says trustees shouldn’t feel pressure to make decisions on investments, and should concentrate on making fewer but better ones. “Don’t churn portfolios, and don’t measure worth by the number of decisions made.”

Some boards in the corporate sector have experimented with appointing a board member specifically to challenge, but Fitzpatrick warns against this. "Independence of views and respectful challenge is good – but if others don’t agree you should abide by the majority view. Trustees need to feel that they have the right to challenge, but that is down to good chairing that invites views while marshalling people towards a decision. It shouldn’t be someone’s specific role to challenge everything for the sake of it.”

Impact measures

So if foundations have the right governance balance and processes to enable long-term thinking, how do they measure the impact they have? Especially as there needs to be a balance between robust measurement and spending too much of everyone’s time and money.

Cox says Esmée Fairbairn does not dictate how its investees and grantees track their impact, but only funds organisations that understand their impact in order to learn and improve. And Fraser feels that the sheer size of Wellcome brings its own challenge. “How do we punch above our weight in our funding? Impact has to be implicit in everything but measurement is challenging, sometimes impossible.”

Fitzpatrick thinks that foundations have to be sensitive to existing good practice and not impose systems of their own on those that they fund. However, he adds: “We also need to focus more on the impact of our grants and how we use all our assets – including our investments – to achieve our charitable objects and move away from just being a cash machine.”

And Renton states that the value of proper measurement shouldn’t be an extra. “We all need to know what is going on. If we’re not measuring a project why are we funding it?”

Neville says that when it comes to grantmaking, a certain amount of risk can be healthy. “Are you happy to fund something that might not have an impact? You need to be honest, but a blame culture precludes risk-taking.”

Renton concurs that foundations need to have the courage to fail. “The privilege and responsibility of running a foundation is enormous. We need to be challenged and need to seek challenge, and we need to influence and change things even if it annoys people.”

Wilding suggests that for better strategic philanthropy, some organisations might consider mergers and collaboration to bring greater scale. Fitzpatrick agrees. “Are there opportunities to pool resources? It is beholden on individual foundations to identify opportunities for collectively using assets.

“However,” he continues, “it can be difficult bringing people together. Sometimes independence can go too far. Being independent for the sake of it has an opportunity cost.”

Cox highlights collaborative engagement as an example of how to make a long-term impact. "There is a link between businesses that are managed in a sustainable way and long-term value creation for shareholders."

Wilding also thinks that there is an important role for foundations in campaigning about the work they are funding. “It is changing, but there’s been a bit of a culture of ‘keep your heads down, it‘s our money, we don’t really want anyone looking into what we do’. The flipside of that is that not many foundations have been involved in influencing to force change. We have got some good examples at the minute – what they are doing at the Lloyds Bank Foundation for England and Wales is actually quite exciting although it is challenging some people, and the Joseph Rowntree Foundation has always been good about this.

“If you want impact over the long term, it isn’t about refereeing the current game but changing the rules of the game in the first place. And I think at this point in time, foundations probably need to reflect on whether they need to do more.”

Indeed, Neville concludes that there are opportunities for foundations to collaborate directly with the corporate sector, as companies are increasingly recognising the importance of expressing social values, especially given the importance placed on this by millennials. “Ultimately, charities have a collective knowledge and history of effecting change that the corporate world doesn’t.”

Ian Allsop is a freelance editor and journalist, and regular contributor to Charity Finance

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